Markets & Finance

Downside Appears Limited

February 25, 2004

By Paul Cherney Indicators are still mixed but there is a positive bias slowly working its way into the markets. The risk of another couple of days of a dip cannot be ruled out but downside appears limited and upside is probably going to be a struggle. I believe we are in the anticipated trading range I have written about in previous comments.

We are now in the seasonal period after February options expirations when, on average, prices have a seasonal history of trending higher. Judging from the low volatility readings, price changes might be very slow, without much ground covered.

Immediate Nasdaq

support is 2,024-2,012, overlapping at 2,014-2,005, and the bigger band established over the months of October, November and December, 2003, is 2,007-1,959; there is a focus of support at 2,001-1,996. Next support is 1,980-1,959. I now think I was wrong to expect Nasdaq prints of 1,982-1,970; the low pass was 1,991. If there are a couple of days of weakness, the 1,982-1,970 area looks like a likely reversal point.

Immediate support for the S&P 500 is still 1,148-1,136.66. The index has printed below 1,136.66 for more than four minutes and that has opened downside risk for prints S&P 500 1,129-1,124, but it is starting to look doubtful that the index can move dramatically lower in the short-run.

Nasdaq immediate chart

resistance is 2,026-2,051, overlapping at 2,049-2,062.48, then 2,072-2,094.92. This resistance actually goes all the way to 2,102; there is a focus of resistance at 2,072-2,091. Next resistance above 2,102 is 2,108-2,153.83.

Chart resistance for the S&P 500 is a small shelf at 1,144-1,149. (If you're looking at the support level of 1,148-1,136.66 and wondering how so similar levels can be both support and resistance, that's what can happen when prices are caught in a trading range.) Resistance is stacked at 1,149-1,176.97 with a layer of resistance inside this zone at 1,155-1,158.89.

I think upside will be a struggle for the next couple of trading days. Volume is in line with a market which has not committed to one side or the other.

The CBOE volatility index, or VXO, is back below its 10-day exponential

moving average, which I interpret as a background positive for prices. Here's a reminder: the VXO measures implied volatility, and the lower the number, the smaller the expectations for price moves. Low volatility means lackluster, anemic price moves. Cherney is chief market analyst for Standard & Poor's